Up Next

Market-Based Solutions to Vital Economic Issues


Building bridges between tax scholars, policymakers and practitioners
News & Media

Q&A: Breaking up businesses with the estate tax

Write-Off: The Tax Blog

A few weeks ago, I testified before Congress. As part of this process, members of the Senate can send me written questions that I am to respond to for the written official record of the hearing. It is my understanding that these official records might be a year or two in coming out, so, in order to have someone see this Q&A before the zombie apocalypse, I am including a few of the more interesting questions, and my responses, here on this blog.

Question 1: Estate taxes. Senate Majority Leader Schumer has stated, with regard to the estate tax “…any organic business–a farm, a small business, and frankly a large business–that would have to be broken up because of the extent of the tax should not be. A business is an ongoing organism. It employs sometimes 10 people and sometimes 10,000 people. To have to break that business up to pay any tax, to me, is counterproductive.”  Do you agree that the tax code should not inhibit owners of any size business from being able to pass along that business, in full, to future generations?

Answer. My children’s great, great, great, grandfather, Lot Adams, after whom my youngest son is named, was born in England, but, after having immigrated to the U.S., and facing religious persecution, went to the safety of the Rocky Mountains. He filed a Homestead Act claim, and, established a farm in Riverside, Idaho. My wife’s grandfather, Bill Adams, as hard-working a man as I ever knew, celebrated a century of his family being on that same farm in southeastern Idaho, with the designation of an Idaho Century Farm, in 1986. He lived there until he died, with his work gloves on, in 2018, and, his son now lives at the farm.[1] I have at least a little understanding of what it means to keep a farm in the family. The current federal estate tax has many provisions enacted with the intention to allow farmers to not have to liquidate farm assets to satisfy the estate tax, and, given these provisions, as well as the very high current threshold below which no estate tax is owed, family farms are rarely, if ever, entirely liquidated to satisfy the estate tax.[2] This is not to say farmers are not burdened by the estate tax, and would be better off without it—they are burdened, and would be better off without it. I support provisions that allow for some assets to be transferred between generations tax-free, as currently exist. Assuming the need for an estate tax, I also support provisions that allow those estate taxes to be paid over long periods of time for those with non-liquid, closely held assets, such that returns from assets may be used to satisfy the tax debt, as opposed to the proceeds from the sale of the assets themselves, as currently exist.

In my opinion, claims of businesses, farms, etc., being broken up because of the estate tax are generally overstated. Business are rarely broken up because of the estate tax partly because of costly and counterproductive estate planning that those subject to the estate tax engage in. In my view, opposition to the estate tax should not hinge on the fact that it, in fact, breaks up small businesses, as this is relatively rare, but that it engenders costly, burdensome, and counterproductive tax planning for relatively little revenue ($12 billion or so a year), that it disincentivizes saving, and other reasons (such as subjective morality-based arguments on what claims a government has on the wealth of its citizens).

(Note to blog readers: Was your business or farm broken up because of the estate tax? If so, let me know.)

[1] My direct ancestors, regrettably, were never successful enough farmers, or successful at anything, for that matter, to have anything of great monetary worth to pass down to any future generation.
[2] According to 2019 IRS data, there were 269 estate tax returns with a positive tax liability that had any farm assets. A farm asset is very different than a farmer—for example, Bill Gates has billions of dollar of farm assets. Many, if not most, if not all, of these “farm assets” could simply be held as part of a real estate portfolio by people who have no active involvement with actual farming. And, even if it does include some farmers who actively farm on real farms, all this says is that they paid some estate tax, not that they lost their farm as a result of the estate tax. Farm assets from taxable returns appear to be a tiny fraction (1.72% of all assets). The average “farm asset” is worth $4.9 million. I emailed the American Farm Bureau asking if they had any examples of farmers who lost their farms because of the estate tax, but have so far received no reply (I will update if I do). In 2001, they could allegedly provide no examples of a farm being lost because of the estate tax.

You may also be interested in: